dropped by a tenth last year, the number of firms going bust was down by a fifth. The fall in bankruptcies in Britain has been one of the largest in a big economy. That is why thehas warned of “pent up” insolvencies. Yet the banks do not see a wave of bankruptcies heading towards them. That is because of the way the government has designed its corporate-loans programme.
In March last year, soon after the first national lockdown began, Rishi Sunak, the chancellor, pledged to support up to £330bn-worth of loans to firms hit by the pandemic. The loans were to be made by the banks; the government would guarantee 80% of them. But even though they were on the hook only for a fifth of any losses, banks were reluctant to extend credit to firms that might fail. Take-up was therefore slow.
Some bankers suspect that many of the firms that have received funding under the scheme would have struggled to get a loan even before the pandemic. But with a 100% government guarantee, applications were waved through with little due diligence. A small-business adviser ruefully notes that many one-man-band firms he advises used the cash to buy a flash new car. Many of those loans will never be fully repaid.
The loan scheme may prove both costly to the taxpayer and a drag on the economy. The generous terms—not just a total guarantee to lenders, but also a 2.5% interest rate with no payments due for the first year—may have created an incentive for banks to keep zombie firms on their books. The process for resolving debt problems at over-leveraged small firms usually starts when banks, as the largest creditors, initiate insolvency proceedings.